China unveils sweeping measures to rescue property market

BEIJING - China announced its most drastic moves to shore up the beleaguered property market by removing the floor on mortgage rates and encouraging local governments to acquire homes to convert them into affordable housing.

The People’s Bank of China effectively scrapped the nationwide minimum mortgage interest rate, while cutting the minimum down payment ratio for first-time buyers to 15 per cent and 25 per cent for second homes, according to a statement on May 17. The previous ratios stood at 20 per cent and 30 per cent respectively.

Beijing also said local governments should acquire, at reasonable prices, commercial homes and turn them into affordable housing, according to state-run Xinhua news agency, citing Chinese Vice-Premier He Lifeng.

“The property sector is related to the interest of the masses and the big issue of economic development,” Mr He said. It is necessary to ensure “the responsibilities of local government, developers and financial institutions”.

The moves are the strongest policies yet to lift the country’s plummeting real estate sector. Policymakers are bringing a sense of urgency to the matter as official data on May 17 showed that home prices in April recorded the

steepest month-on-month drops in a decade

. That comes even after a slew of incremental policies were issued to aid the sector.

“This is the most relaxed down payment policy ever in China,” said E-house China Research and Development Institute research director Yan Yuejin. “It signals the central government is really prioritising home-buying demand.”

It marks

a new phase in the government’s campaign

to address the biggest drag on economic growth. China’s property downturn is threatening social stability as protests spike and unsold housing inventory is hovering at an eight-year high. With construction work halted and developers defaulting, about five million people are at risk of unemployment or reduced incomes.

The move “is unexpected and positive for property stocks”, said Mr Jeff Zhang, an analyst at Morningstar in Hong Kong.

The Shanghai Stock Exchange Property Index surged following the statement, climbing as much as 3.2 per cent before paring some gains. Shares of Chinese developers jumped 3.68 per cent on May 17 after the announcement. The benchmark has rallied 31 per cent in May.

Lowering mortgage rates

The Vice-Premier said the local authorities should buy back or retract land parcels that have been sold but remain idle, as a means to ease developers’ cash-flow strains.

He also emphasised the need to push forward the so-called “three big projects” that involve affordable housing, urban renovation and public infrastructure.

China

began lowering the nationwide floor of mortgage rates

in 2022 and allowed localities that suffered the most declines to set their own minimum rates. Such measures have led to a drop in the average rate on newly granted mortgages to 3.69 per cent in the first quarter – the lowest since recording began in 2009 – but failed to ignite purchase demand.

The moves are set to further squeeze the margins of Chinese state lenders. The protracted property downturn has already thinned net interest margins and pushed up bad loans.

Chinese banks’ net interest margin dropped to a record low of 1.69 per cent as of the end of 2023, well below the 1.8 per cent threshold regarded as necessary to maintain reasonable profitability.

Some analysts say it is still unclear how effective the measures will be, depending on enforcement.

“The effects will depend on whether consumers will take heart,” said Beijing-based investment bank Chanson & Co director Shen Meng. If not executed well, “it’s unlikely to stimulate demand and induce a structural turnaround”. BLOOMBERG